Saving our heritage
The Acceptance in Lieu (AIL) scheme enables taxpayers to transfer important heritage property into public ownership in payment of Inheritance Tax (IHT) and Estate Duty (ED). The scheme, a key element in the government’s general strategy to ensure that the most important of the nation’s cultural objects remain within the UK and become accessible to the public, is one of the most successful ways of utilising the generosity of the Treasury. It was introduced by section 56 of the Finance (1909-10) Act 1910, which came into force on 29 April of that year, so it is nearing its centenary.
Since 1985 the then newly established Museums and Galleries Commission - now the Museums, Libraries and Archives Council (MLA) - has given advice to ministers on the quality and value of objects offered in lieu. As the work increased, in volume and complexity, an AIL Panel was set up. This panel now consists of 10 people under the chairmanship of Jonathan Scott. It meets once a month at the offices of MLA in London. MLA is fully committed to backing the scheme, which its chairman, Andrew Motion, recently described as ‘one of the jewels in the crown of the MLA.’ Since 1998 the AIL Panel has also advised HM Revenue & Customs (HMRC) on quality and public access arrangements when objects are claimed to be pre-eminent and exempt from IHT. In April 2005, following Sir Nicholas Goodison’s recommendation to the Treasury to pool the work of various programmes that affect museums and private owners in a single unit, to ‘create a powerfully experienced body capable of giving trustworthy and disinterested advice’, these advisory functions were combined in an agreement between Department for Culture, Media and Sport (DCMS) and MLA dated 1 April 2005, with the delegation to MLA of the Secretary of State’s function in England of agreement to the acceptance of cultural objects in lieu of IHT. To these were added the functions in relation to the government indemnity scheme, the grant of export licences for objects of cultural interest and the Secretariat for the Reviewing Committee on the Export of Works of Art, to form what is now widely known as the Acquisitions, Export and Loans Unit.
The provisions enabling acceptance in lieu of IHT are contained in §230 and §231 of the Inheritance Tax Act 1984 (IHTA). They provide that offers are made to the Commissioners of HMRC and that they may accept items offered if they think fit and if the Secretary of State agrees. Ministers throughout the UK are advised by the AIL Panel in deciding whether or not to approve an offer.
The offer must be made by those liable to pay IHT or ED. It must consist of property to which the offeror has unencumbered title. Difficulties can arise when the person wishing to make the offer is not the person liable for the tax. It is often possible where the tax liability arose on a death to overcome such difficulties by a disposition under §142 or §144, IHTA. If one is faced with such a dilemma an early dialogue with the Heritage Team of HMRC is recommended. To avoid difficulties arising post-death it is recommended that items which are earmarked for offer in lieu are left in residue.
Any single item, collection or group can be offered as long as it is of pre-eminent heritage quality or it is or has been kept in a building that, inter alia, has been accepted in lieu or is owned by one of the bodies listed in Schedule 3 IHTA (Schedule 3 bodies).1 As well as paintings, sculptures and decorative arts, archives, scientific and historical items are within the scope of the scheme. Offers of boats, planes, classic cars and medals and decorations have been made and, potentially, trains also come within the scope of AIL.
As a result of an increased awareness of the looting of art during the Nazi era and the problems with provenance generally, all offerers must provide as much detail as possible on the provenance of the offered items so that title can be established. They must also sign a declaration, in the form of a Due Diligence form, blank copies of which are available from MLA, confirming that they are able to transfer the item with free and unencumbered title. The government has made it clear that it will use its discretionary powers to turn down offers where there are unsatisfactory gaps in provenance. The giving of warranties in such cases is of no practical use as once an offer has been accepted it cannot be undone.
The offer in lieu should be made, or at least foreshadowed, as soon as possible after the taxable event. In the May 2003 special edition of the IHT Newsletter, HMRC indicated that a valid offer depends on current liability for IHT or interest. If IHT had already been paid, HMRC would not entertain a subsequent offer. But it would do so where the tax had been paid in order to obtain the grant or confirmation, providing it had been notified at or around that time that an offer might be made. And it would do so where it was holding money on account, to the payer’s order, when the liability thus remained unpaid. It is not necessary to wait for the grant before making an offer, but the offer will not be processed and acceptance cannot occur until the grant has issued.
When an offer is made the following should be provided to HMRC:
- A detailed description of each object, group or collection offered with a valuation as at the date of the offer;
- A note of any wish or condition attaching to the offer, e.g. as to allocation to a particular gallery or museum;
- A paper containing, in relation to each object offered, a justification of its valuation, e.g. through comparable auction sales, and, for each object, group or collection, an explanation of its claim to be pre-eminent or otherwise eligible for acceptance;
- Three colour photographs of professional quality and taken with appropriate lighting and, if possible, a jpg of at least 300 dpi, and
- The current location of each object offered and contact details of the person with whom to arrange inspection.
It helps speed matters up if at the same time three copies of the above are sent to MLA. HMRC will also need details of the persons making the offer and the capacity in which they are making it, the taxable occasion against which the offer is being made and a calculation of the tax credit that would be generated by acceptance of the offer at the offer value. That credit is the open market value, minus any tax which would have been payable had the transaction been a sale in the open market, plus by virtue of an administrative arrangement known as the douceur, a percentage of that notional tax. The percentage is 25 per cent for an object and 10 per cent for land. This is commonly known as the ‘Special Price.’
Once HMRC is satisfied that the offer is competent, it refers it formally to the AIL Panel, which seeks advice from at least two experts, one commercial and one from a museum or academic background. The AIL Panel then assesses the advice and, if necessary, will seek further clarification or further advice if the initial opinions are not unanimous.
The expert advisors are asked to comment on the pre-eminence, physical condition and valuation of the item and, if the offer is conditional on allocation to a named institution, on the suitability of that allocation. They will need to inspect the item. They assess pre-eminence by reference to the guidance mentioned already, not only in a national context, but also within either a regional or local ambit. The panel’s remit is to maintain the highest standards in respect of what is recommended as pre-eminent.
Section 230(3) permits acceptance of objects that are not necessarily pre-eminent but which are, or have been, kept in a relevant building, e.g. in the ownership of a Schedule 3 body such as the National Trust. Such associated chattels must make a significant contribution to the decoration or understanding of the property within which they are located. They must either be in the building or have been at some earlier time, the intention being to reunite them with their previous home.
Valuation is the issue where an offer may be contentious and some are put off offering items in lieu because they consider that they would thereby lose the chance to test the open market. The AIL Panel has a duty in advising the Secretary of State with regard to the question of value to do justice to the offeror and to the nation. It has no intention of seeking a bargain. Where genuine differences of opinion arise about the merits of an item the Panel is happy, if requested, to convene a meeting between its experts and the offeror and his or her advisors. The number of offers that fall because negotiations on valuation break down is very low. If the Panel considers the offer price an undervaluation it will advise the offeror, who is invited to raise the offer price.
A variation on the straightforward offer in lieu is the so-called ‘hybrid’ offer. This concept was invented many years ago, when a most important painting was under threat of sale. The painting’s value would have satisfied considerably more tax than was payable. Then, as now, there was no provision for HMRC to accept a part share of an item or offer ‘change’ to the offerer. As HMRC did not have the power to make good the difference the solution was for the Tate, on whose desiderata list the picture had long been, to pay the difference. In return the estate named the Tate the conditional allocatee of the painting. In that case the Tate, with the help of funding bodies, paid the difference to ensure that the estate did not suffer financially. With prices for important works of art spiralling and sophisticated tax planning being available, hybrid offers of this sort, often with the payment of the excess being spread over two or even three years, depending on what the offerer is prepared to agree with the participating institution, have become an increasingly important and vital tool in museums’ efforts to acquire the very best works of art.
Acquiring important objects and collections, whether historic or contemporary, is the lifeblood of museums. Schemes such as AIL are vital to this and to lessening the flow of our heritage abroad. It is the most important means of acquiring great works of art and other important items for public ownership. As David Lammy said in the House of Commons on 11 October 2006 (Hansard 11/10/06 column 421) ‘it is in nearly every way the holy grail of public policy. Absolutely everybody is a winner under the scheme.’ So, when the tax opportunity arises, please consider making use of the scheme.
- 1Guidance on pre-eminence based on long-standing Treasury guidelines is given in Appendix 5 of the 2008/09 AIL Report, which is available on the MLA’s website.
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